Increasing numbers of analysts are now forecasting that the Federal Reserve will not implement any rate cuts before 2025. This follows an unexpected rise in US inflation in February, suggesting that the Federal Reserve may postpone any thoughts of reducing rates. Despite previous market expectations of an interest rate cut in June, experts at Vanguard, Apollo, and other institutions are now suggesting that the Fed could maintain current interest rates throughout the year.
Data from the US Bureau of Labor Statistics revealed that the US Consumer Price Index (CPI) increased to 3.2% in February, surpassing expectations that it would remain unchanged from January’s figure of 3.1%. The combination of higher-than-anticipated US inflation and a robust economy has diminished the likelihood of a Fed rate cut, a prospect that investors had been advancing for several months.
According to the CME FedWatch Tool, the likelihood of interest rates remaining unchanged in May is above 88%. The probability that the Fed will also refrain from reducing interest rates in June has increased from 7% to 30% over the last month. At the beginning of the year, the market estimated the probability of this scenario at less than 1%. The chance that the Fed will maintain interest rates in the current range of 5.25 - 5.5% on 18 December this year stands at 0.6%, according to the CME FedWatch Tool. Nevertheless, the faction advocating for “zero interest rate cuts” is becoming increasingly vocal.
Roger Aliaga-Díaz, the Chief Economist at Vanguard, stated that it remains a distinct possibility that the Fed will not lower interest rates at all this year. “The ideal outcome of strong growth coupled with lower inflation was achieved through a timely expansion of the supply side of the economy, chiefly attributed to better-than-expected growth in the labour market and productivity. This underpins our revised economic forecasts, which predict stronger growth, a resilient labour market, persistent inflation, and a cautious approach by the Fed towards its first rate cut, including the possibility that it may not reduce interest rates at all this year and keep its target for the federal funds rate around its current range of 5.25% - 5.5% for the remainder of 2024,” explained Aliaga-Díaz.
Gentle downturn not to be dismissed
However, Aliaga-Díaz suggested that a scenario of a gentle downturn with moderate Fed cuts should not be dismissed outright. Should the strong supply side persist throughout 2024, it could likely establish conditions whereby inflation reverts to the Fed’s target level more swiftly, without impairing economic growth or the labour market.
Mark Okada, founder and CEO of Sycamore Tree Capital Partners, also believes there’s a significant likelihood that the Fed will leave interest rates unchanged this year. More critically, he posits that the market is largely indifferent to these interest rates. “Inflation has exceeded expectations, while stock markets are reaching all-time highs. This market is not dominated by Fed actions,” Okada remarked to CNBC.
Torsten Slok, Chief Economist at Apollo Management, has recently aligned with other economists who anticipate that a resurgence in the US economy will prevent the Federal Reserve from cutting interest rates in 2024. This group also includes former Treasury Secretary Lawrence Summers and strategists at Citigroup.
Data does not show slowdown
“The core message is that the Fed will be preoccupied with combating inflation for the majority of 2024,” Slok commented in a note to clients. He believes that yields in fixed-income markets, such as US government bonds, will remain elevated. “The market must now acknowledge that the data does not indicate a slowdown,” Slok stated during an interview with Bloomberg Surveillance Radio. “Everything suggests that consumer spending, investment in capital goods, and hiring will continue to support growth for much of this year.”
Some analysts contend that the current high interest rates are not causing significant harm. “The longstanding belief on Wall Street is that interest rates rise until something breaks. At least regarding interest rates, we haven’t seen enough disruption yet to cause the damage many anticipate,” Jim Bianco, head of Bianco Research, observed.